Liquidity reigns supreme as market ignores data points

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The Nifty crossed 5350 levels last week after nearly three months with strong buying by FIIs, closing about two pct higher at 5320. Stronger than expected U.S. payroll data, positive cues from the euro zone and comments from Finance Minister Palaniappan Chidambaram assuring to unveil a path of fiscal consolidation and undertake remedial measures to revive the domestic economy, boosted investor sentiment.

However, negative IIP data along with weak corporate results disappointed the markets in the latter half of the week, causing the indices to trim some of the earlier gains.

On the domestic front, IIP data saw a contraction of 1.8 pct for the month of June. The poor numbers may pose a strong case for rate cuts in the future, but with inflation fears looming large, the Reserve Bank of India may continue with its hawkish stand.

FIIs have made purchases of $64 mln till date. This comes on the back of substantial purchases in July when they bought shares with a net worth of $176 mln. The liquidity-driven rally will tire out if it’s not backed by policy action and data points, both of which seem doubtful in the near future. But as of now, the markets are dictated by liquidity flows.

Monsoons have picked up with rainfall deficiency dropping from 22 pct to 17 pct but the damage seems to have been done to a large extent.

The India Meteorological Department (IMD) expects normal rains in August — a critical month for summer crops. It expects rainfall to be 5-6 pct below average in September due to the possibility of El Nino setting the stage for a dole out from the centre.

The new finance minister is facing the onerous task of bringing the government’s financial house in order with expenses exceeding revenues, mainly due to subsidies for the ‘3Fs’ — fuel, food and fertilizer — but he has reassured that he would ‘try’ to rein in the subsidy burden. Given the political equation and elections slated in the next 18 months, it remains to be seen how the finance minister would carry on with this arduous task, as elections sops would add to the burden of the already heavily saddled exchequer.

In the next few months, a number of states will seek drought relief and with the impending food security bill which gains importance closer to the elections, I don’t understand how the finance minister will manage the tightrope walk — forget the rosy path which is being shown. The food subsidy alone will balloon to about $18 bln.

The diesel price hike, which is overdue, still doesn’t have a political consensus in spite of oil marketing companies reporting record losses. The much hyped FDI in multi-brand retail seems to have consent only from Delhi and three union territories, which makes it a non-starter. The only plausible action that could cheer the market is the reversal or dilution of the anti-avoidance tax proposal — the General Anti-Avoidance Rules (GAAR) — and this is the only measure which he seems to be in control of. But this could be self-defeating if India loses investment grade by then.

The monsoon session of parliament began on a stormy note last week.

There are around 30 bills awaiting the attention of parliament. I expect some bills such as the Lokpal, Land Acquisitioning Relief & Rehabilitation (LARR), Mining & Mineral (Development & Regulation) Bill, Companies Bill 2012 to see the light of day in this parliament session notwithstanding more stormy encounters.

Internationally, Standard and Poor’s downgraded the credit rating outlook on Greece to ‘negative’ stating that worsening economic activity would make it difficult for the government to make further spending cuts, which is crucial to secure the next disbursement under the international bailout program. Whereas positive news emanated from the U.S. where job openings increased by 105,000 to 3.76 million in June from 3.66 million in May, a large increase considering job openings increased by only 416,000 for the entire year between June 2011 and May 2012.

Closer home, Moody’s downgraded the Indian growth forecast to 5.5 pct and we may need to brace for more such downgrades.

The results declared last week disappointed the street with Bharti Airtel reporting a dismal set of numbers with a higher-than-expected contraction of margin. The stock has been downgraded by most of the brokerage houses and is out of the coveted top 10, closing 14 pct lower. Tata Motors reported a 12 pct rise in profits against the expected 25 pct but the State Bank of India, in spite of better-than-expected profit figures, disappointed the street with the asset quality.

The PSU banking sector has an inherent risk of falling prey to political motives, especially relating to farm loans. With the monsoons playing truant and elections in 2014 or earlier, the ground would be well laid for a populist measure like a farm loan waiver. The other sectors where these banks have huge exposure are power, telecom and aviation, all of which are going through tough times.

Next week will be a truncated one with Wednesday being a national holiday for Independence Day. Progress of the monsoon rains, inflation data and some prominent Q1 results will dictate the trend on the bourses. Tata Steel and Coal India unveil Q1 results on Monday but they may not drive the markets. The week could be range-bound with a negative bias as the market gives some breathing space to the new Pied Piper on the street.

Spains GDP dropped .3% in the first quarter,.4 percent in the second quater and is expected to decline .5 percent for the entire year of 2013 with a return to growth in 2014. Yes GDP barely moving at all.

The unemploymnet rate is near 25% nationwide and a horrifying 51% for people under age 25.
So how does GDP of an economy barley move when so many are not working ,especially the young and presumably most able and healthy,just out of school/college?

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Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.